312MKT International Marketing Lecture Eight

Learning objectives Identify the various market entry options available to companies seeking to develop new markets Understanding the factors affecting the selection of market entry mode. Understand Risk and Control

Market Entry Method “The market entry decision is taken within the firm and is determined to a large extent by the firm’s objectives and attitudes to international marketing and the confidence in the capability of its managers to operate in foreign countries” (Doole and Lowe, 2012)

Market Entry Method Refer to “an institutional arrangements for the entry of a company’s products and services into a new foreign market. The main types are export, intermediate and hierarchical modes” (Hollensen, 2017).

Market Entry Method The following criteria are necessary to consider when deciding on a market entry method: The company objectives and expectations relating to the size and value of anticipated business. The size and financial resources of the company Its existing foreign market investment The skills abilities and attitudes of the company management towards international marketing (Doole and Lowe, 2012)

Market Entry Method 2 important characteristics associated with the different market entry methods The level of involvement of the firm in international operations The level of risk and control “The higher level of involvement brings greater potential for control exercised by the company over its foreign country marketing activities and also higher potential risk, usually due to the high cost of investment” (Doole and Lowe, 2012)

Market Entry Methods and the Levels of Involvement in International Markets Wholly-owned subsidiary Company acquisition Assembly operations Joint Venture Strategic Alliance Licencing Contract manufacture Direct Marketing Franchising Distributors and agents Sales force Trading companies Export management companies Piggyback operations Domestic purchasing Levels of Involvement (Doole and Lowe, 2012)

Risk and Control in Market Entry Co-operation Strategies Joint ventures Strategic alliances Manufacturing Own subsidiary Acquisition Assembly Direct Exporting Distributors Agents Franchising Management contracts Indirect Exporting Piggybacking EMCs, trading companies etc. Domestic purchasing Risk (Doole and Lowe, 2012)

Market Entry Strategies Indirect Exporting Suitable for firms with few resources Advantages: low cost and risk Disadvantage: low level of control Main methods domestic purchasing, export houses, piggybacking, trading companies. Direct Exporting More proactive approach Involves direct investment Main methods: agents, distributors, management contracts, Franchising Advantages: More influence and control on international activities Disadvantages: high cost and financial burdens (Doole and Lowe, 2012)

Direct and Indirect Franchising Models Host Country Home Country Franchisee Franchisor Franchisee Franchisee Indirect Franchising Model Master Franchisee (Sub-Franchisor) Franchisor Franchisee Franchisee Franchisee Source: based on Welsh et al (2006) in Hollensen S. (2008)

Components of the Export Marketing Mix Product: selection, development and sourcing Pricing: policy, strategies, discount structures and trading terms Promotion: corporate promotions and local selling, trade shows and literature Distribution: sales force management, agents, distributors, and logistics (Doole and Lowe, 2012)

Components of the Export Marketing Mix Services: market research, training, and sales servicing Finance: budget, order processing, insurance and credit control Technical: specifications, testing and product quality and Administration (Doole and Lowe, 2012)

Market Entry Strategy Factors contributing to successful exporting: Commitment to the firm’s management Exporting approach which emphasize the importance of augmenting and maintaining skills Good marketing information and communication system Sufficient production capacity and capability, product superiority and competitive pricing Effective market research Effective national export policy (Doole and Lowe, 2012)

Manufacturing Entry strategies without direct investment Manufacturing using production and service supply from overseas plants Advantages: Product/service, transporting and warehousing, tariffs barriers/quotas, government regulations, market, government contacts, information, informational culture, delivery, labour cost Types: Contract manufacturing (e.g. Nike, Gap), Licencing (e.g. Disney, Olympic Game committee) (Doole and Lowe, 2012)

Manufacturing Entry strategies with direct investment Manufacturing by investing to local operations Reasons/advantages: to gain new business, to defend existing business, to move with an established customer, to save costs, to avoid government restrictions. Types: Assembly (e.g. Honda), wholly owned subsidiary, company acquisitions and mergers. (Doole and Lowe, 2012)

Manufacturing Entry strategies with direct investment Manufacturing by investing to local operations Jaguar’s production operation in China Web-link https://www.youtube.com/watch?v=HwWOFFDF0Jw Jaguar’s factory plans in Slovakia https://www.youtube.com/watch?v=Vvim7bmX_BI (Doole and Lowe, 2012)

Cooperative Strategies Joint Venture Occur when a company decides that shared ownership of a specially set up new company for marketing and/or manufacturing is the most appropriate method for exploiting a business opportunity.. Advantages: comply with foreign ownership restrictions, speed up of market entry, new opportunities, competitive advantage, companies can share investment costs and risk, shared knowledge Disadvantages: high investment cost (Doole and Lowe, 2012)

Cooperative Strategies Strategic Alliances Cover a variety of contractual arrangements that are intended to be strategically beneficial to both parties but cannot be defined as clearly as licencing or joint venture. Reasons: Insufficient resources, pace and innovation of market diffusion, concentration of firms in mature industries, high R&D costs, government co-operations, self-protection, market access. Advantages: competitive advantage (e.g. airlines star alliances) (Doole and Lowe, 2012)

Strategic Alliances: 3 types Marketing (eg.airlines?) R & D (eg. pharmaceuticals) Production(eg. cars)

Classifications of Market Entry Modes Export modes 100% Externalizing (low control, low risk, high flexibility) Intermediate modes (contractual modes) (shared control and risk, split ownership) Hierarchical modes (investment modes) 100% Internalizing (high control, high risk , low flexibility) (Hollensen, 2017)

Factors for Selecting Foreign Appropriate Market Entry Mode Internal factors Desired mode characteristics Transaction- specific factors External factors Entry mode decision (Hollensen, 2017)

Internal Factors Firm size Increased resource availability provides the basis for increased international involvement over time. International experience International experience reduces the cost and uncertainty of serving a market and increases the probability of firms committing resources and directly investing in foreign markets. Product/service Physical characteristics of the product or service such as it value/weight ratio, perishability and composition, are important in determining where production is located (Hollensen, 2017)

Desired mode characteristics Risk-averse If decision makers are risk-averse they will prefer export modes (e.g. indirect and direct exporting) or licensing (an intermediate mode) Control The less the resource commitment (e.g. indirect exporting) the less the control. Flexibility The hierarchical modes (involving substantial equity investment) are typically the most costly, but the least flexible and most difficult to change in the short run. (Hollensen, 2017)

Transaction-specific factors Tacit nature of know how The more the tacit the firm’s know how, the more favourable the hierarchical modes which facilitate the intra-organizational transfer of know how. External Factors Sociocultural distance between home country and host country The greater the perceived distance between the home and host country in terms of culture, economic systems and business practices, the more likely the firm will be reluctant to enter the specific host country regardless of the mode of entry. (Hollensen, 2017)

External Factors Country risk/demand uncertainty Risk analysis of both the country and the mode of entry. The higher the risk the higher the demand uncertainty experienced by the firm. Direct and indirect trade barriers Tariffs or quotas on the import of foreign goods components favour the establishment of local production Trade regulations (Hollensen, 2017)

External Factors Intensity of Competition The greater the intensity of competition in the host market, the more the firm will favour entry modes that involve low resource commitments. Small number of relevant intermediaries available Companies in this case tend to favour the use of hierarchical modes in order to reduce the scope for opportunistic behaviour (Hollensen, 2017)

Subway Story International Expansion Weblink: https://www.youtube.com/watch?v=WJOEZGI50B8 (Hollensen, 2017)

Doole and Lowe: Chapters 5, 7 Hollensen: Chapters 9,10,11,12 and 13 Readings Doole and Lowe: Chapters 5, 7 & Hollensen: Chapters 9,10,11,12 and 13